This New York Times article here could have been a perfectly reasonable thought piece on the (perhaps unintended) effects of several provisions in the tax code. But in an institutional desire to land a few more blows on Trump, they tried to morph it into a hit piece on Jared Kushner --"Jared Kushner Paid No Federal Income Tax for Years" screams the headline.

Look NYT: I find Trump distasteful as well. But you only embarrass yourself presenting as some kind of investigative bombshell that Jared Kushner used perfectly legal deductions to minimize his tax bill.

I recommend this ZeroHedge summary to you as a quick way to get to the meat of the Times article. As they summarize it, the Kushner tax "maneuver" consists of:

tep 1: The Purchase

Kushner Companies buys a property. The majority of the money for the purchase comes in the form of mortgages and personal loans from banks.

Step 2: The Write-Off

Under the federal tax code, real estate investors can write off the purchase price of the building — excluding the cost of the land — over a period of decades. Although Kushner Companies has spent little or no cash of its own, the firm takes large annual deductions based on the theoretical depreciation of the building.

Step 3: The Loss

The property generates cash for the Kushners. But any earnings, which would be subject to the federal income tax, are swamped by the amount that the company is taking in write-offs for depreciation. The result is that Kushner Companies records a net loss for tax purposes.

Step 4: The Investors

The company passes on that loss to its owners, including Mr. Kushner and his father, Charles.

Step 5: The Offset

The loss can be used to offset the Kushners’ income in the year it is recorded, and it can be carried forward to cancel out future income or to get refunds for taxes they paid in previous years.

Step 6: The Deferral

When Kushner Companies sells a property, it can use the proceeds to finance a new acquisition. If done within the right time frame, the company can indefinitely defer any capital-gains taxes it might owe on the sale of the original property.

So here is my confession. I did the exact same thing just last year on my taxes. Take one example: One of my businesses bought and installed $350,000 of equipment. I financed 100% of this purchase. The article says that Kushner depreciated his real estate purchases over decades but the tax code's accelerated depreciation provisions allowed me to depreciate this purchase 100% in the first year. So I had an immediately $350,000 loss that I netted against other income, grealy reducing my taxes on that income. In fact, I don't think I was able to use it all due to various tax rules and I carried over a part of it to cover 2018 taxes or beyond.

One could argue about whether the accelerated depreciation provision I took advantage of is too generous, but the tax code is always going to allow depreciation against some formula (or else every business would be substituting crazy rental schemes for capital investment).

Let's take each step from above

The Times wants to make a big deal that somehow the fact that he is using borrowed money to buy assets is a factor in this, but why? They imply a couple of times that all the debt reduces his ownership, but that is not true. He still owns 100% of the asset (with the proviso the bank has a lien that is only meaningful in case of default. His equity is only a fraction of the purchase price, but that is a different thing and says nothing about his ownership

The depreciation provisions are pretty standards as described across all businesses, except to say that they are less generous than the ones I get buying equipment. Again they seem to think that somehow the fact that he borrowed most of the money is relevant to this -"Mr. Kushner is getting tax-reducing losses for spending someone else’s money" -- but his financing strategy is not the least relevant. He took on a costly and risky long-term obligation when he borrowed the money. Is the NYT arguing for requiring cash accounting for taxes?? This is just embarrassingly ignorant.

This is entirely normal

This is entirely normal for s-corporations and LLC's. These were promoted for small business, and they are fabulous tools for entrepreneurs, but you have to provide these legal tools to all people, even to rich people in families you don't like.

This is entirely normal. Any other rule would be grossly unfair and a kick in the nuts for entrepreneurs. I often spend money this year that generates revenues next year. The tax code recognizes this and agrees that the losses I took this year can be netted against the revenues next year that they helped to facilitate.

This is the only thing that is mildly unique to real estate and his business. I don't really get the same rights with any of my assets, though my assets mostly depreciate rather than increase in value. I won't pass judgement on this one, but I suspect that it has a lot of support (homeowners get it, for example, as do owners of second homes).

Nowhere is there even a suggestion of how the tax code might be altered to fix those things the NYT does not like about it. I would suggest that any step that would alter any of the 6 steps above would be opposed even in a Democratic Congress. This all reminds me of a piece a few years ago arguing that oil companies got a lot more subsidies than renewables like wind and solar. Checking it out, the vast, vast majority of the subsidies were ... LIFO inventory accounting and depreciation, both tax rules that are 1) merely about timing of taxes and not total paid and 2) apply to all manufacturing businesses in all industries.

I am always amazed that the media will credulously run stories against "corporate welfare" for oil companies (which usually mostly includes things like LIFO accounting and investment tax credits that are not oil industry specific) but then beg and plead for us taxpayers to subsidize movie producers.

I wish I understood the reason for the proliferation of government subsidies for film production. Is it as simple as politicians wanting to hobnob with Hollywood types? Our local papers often go into full sales mode for sports team subsidies, but that is understandable from a bottom-line perspective -- sports are about the only thing that sells dead-tree papers any more, and so more local sports has a direct benefit on local newspapers. Is it the same reasoning for proposed subsidies for Hollywood moguls?

Notwithstanding a recent flurry of Super Bowl-related documentaries and commercials that got 2015 off to a good start, Arizona appears to be falling behind in a competitive and lucrative business. The entertainment industry pays well, supports considerable indirect employment and offers the chance for cities and states to shine on a global stage.

Seriously? I am sure setting up the craft table pays better than catering a party at my home, but it is a job that lasts 2 months and is then gone. Ditto everything else on the production. And I am sick of the "shines on the world stage thing." Who cares? And is this really even true? The movie Chicago was filmed in Toronto -- did everyone who watched Chicago suddenly want to go to Toronto? The TV animated series Archer gets a big subsidy from the state of Georgia. Have they even mentioned Georgia in the series? Given the tone of the show, would they even want to be mentioned?

When government subsidizes an industry, it is explicitly saying that resources are better and more productively invested in the subsidized industry than in other industries in which the money would have been spent in a free market. Does the author really have evidence that the money I would have spent to improve the campgrounds we operate in Arizona is better taken from me and spent to get a Hollywood movie shot here instead? Which investment will still be here 6 months from now?

Arizona is one of 11 states that don't offer tax incentives, primarily in the form of income-tax credits, and that's the core of the problem. There's also no state film office to help out-of-state crews obtain filming permits, locate vendors, hire temporary staff and so on.

Arizona's tax incentives expired after 2010 and the film office closed in the wake of a recession that hit the state especially hard and necessitated tough spending choices. Although bills to revive those programs have been introduced, they're not given high odds of success in the current session as the governor and lawmakers struggle to close $1.5 billion in deficits over this year and next.

"Right now, there's nobody to call, the phone isn't being answered and nobody responds to e-mails," said Mike Kucharo, a local producer and director who serves as the state-government liaison for the Arizona Production Association, an entertainment trade and networking group. "We need a film office."

Yeah for us! While all the lemmings in other states bid up the price of a few politicians being able to get their picture with Hollywood types on a production set, we have chosen not to play. Good for us. Only an industry insider clown with a straight face could say that we need a taxpayer-funded film office. Really? Do we need a taxpayer-funded florist office to attract flower sales?

Years ago I wrote an article calling sports team subsidies a prisoners dilemma game, where the only winning move was not to play. The NFL has 32 teams, mostly in the largest cities. Without subsidies the NFL would have ... 32 teams, mostly in the largest cities, and taxpayers would have saved billions of dollars. The same is true for film:

Indeed, the number and size of incentives escalated from just two states offering $2 million in combined incentives in 2003 to 40 states offering $1.2 billion just six years later, according to the Tax Foundation.

So subsidies have gone up by over a billion dollars a year, and yet roughly the same films are being made. This is one of the best examples I can think of where politicians are using taxpayer money to increase their personal prestige. The AZ Republic should be embarrassed they are out front actively encouraging this behavior.

Postscript: For all of its flaws in teaching real-world relevant business topics, the Harvard Business School was very good, at least when I was attending it, at teaching business strategy. My memory may be fuzzy here, but I am pretty sure that "40 other groups have all jumped into this activity and have ramped up their spending by a factor of 50 in just six years and all 40 competitors are really focused on winning almost irregardless of the price they pay" is not a very good pitch for investing money in a new field.

Postscript #2: All of this is a wonton violation of the AZ state Constitution, though of course big government advocates are really good at totally ignoring Constitutional limits on government power. Here is what our Constitution says:

Section 7. Neither the state, nor any county, city, town, municipality, or other subdivision of the state shall ever give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation, or become a subscriber to, or a shareholder in, any company or corporation, or become a joint owner with any person, company, or corporation, except as to such ownerships as may accrue to the state by operation or provision of law or as authorized by law solely for investment of the monies in the various funds of the state.

Similar to most targeted tax breaks, movie production incentives routinely fail to deliver on the economic promises made by their proponents. Supporters frequently claim movie incentives create jobs and lead to net gains in tax revenue. However, data from several states find movie production incentives generate less than 30 cents for every lost dollar in tax revenue.

Providing tax breaks specifically to the film industry is an example of government working to choose winners and losers in the marketplace. States could attract almost any industry if they paid for a quarter to a third of its expenditures, but such a policy would be fiscally unsustainable. A better system would be to lower state tax rates for everyone, encouraging economic growth.

Film is a particularly poor industry to subsidize because it does not create long-term employment and other lasting economic benefits for states. Even though a well-made film might boost tourism, productions only offer short-term employment and the workers are highly specialized. Production and workers can easily move from one location to wherever better deals are offered.

When the Left has talked about oil and gas subsidies, I have generally nodded my head and agreed that any such things should be eliminated, just as they should be eliminated for all industries. They have in the past thrown out huge numbers for such subsidies that seemed high, but I have not really questioned them. But then I see this chart at Kevin Drum's site

Seriously, nearly half the "subsidy" number is the ability of a company to use LIFO accounting on inventory for their taxes? Since the proposition is to eliminate these only for oil and gas, what is the logic that somehow LIFO accounting is wrong in Oil and Gas but OK in every other industry? In fact, at least the first two largest items are both accounting rules that apply to all manufacturing industry. So, rather than advocating for the elimination of special status for oil and gas, as I thought the argument was, they are in fact arguing that oil and gas going forward be treated in a unique and special way by the tax code, separate from every other manufacturing industry.

In fact, many of these are merely changes to the amortization and depreciation rate for up-front investments. Typically, politicians of both parties have advocated for the current rules to encourage investment. Now I suppose we are fine-tuning the rules, so that we encourage investment in the tax code in everything but oil and gas. I will say this does seem to be consistent with Obama Administration jobs policy, which has been to try to stimulate businesses that are going nowhere and hold back the one business (oil and gas drilling) that is actually trying to grow. I am fine with stopping the use of the tax code to try to channel private investment in politician-preferred directions. But changing the decision rule from "using the tax code to encourage all manufacturing investment" to "using the tax code to encourage investment only in the industries we are personally sympathetic to" is just making the interventionism worse.

This is really weak. Not to mention flawed. Unless I am missing something, a change from LIFO to FIFO or some other inventory valuation rules will create a one-time change in income (and thus taxes) when the change is made. LIFO only creates sustained reductions in taxable income, and thus taxes, if your raw materials prices are consistently rising (it actually increases taxes vs. FIFO if input prices are falling). Given that oil and gas prices are volatile, its hard to see how this does much except extract a one-time tax payment from oil companies at the changeover.

By the way, I am pretty sure I would be all for ending government spending on "ultra-deepwater and unconventional natural gas and other petroleum research," though ironically this is exactly the kind of basic research the Left loves the government to perform.